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Taxing Away M&A: The Effect of Corporate Capital Gains Taxes on Acquisition Activity

Author

Listed:
  • Lars P. Feld
  • Martin Ruf
  • Ulrich Schreiber
  • Maximilian Todtenhaupt
  • Johannes Voget

Abstract

Taxing capital gains is an important obstacle to the efficient allocation of resources because it imposes a transaction cost on the vendor which locks in appreciated assets by raising the vendor’s reservation price in prospective transactions. For M&As, this effect has been intensively studied with regard to shareholder taxation, whereas empirical evidence on the effect of capital gains taxes paid by corporations is scarce. This paper analyzes how corporate level taxation of capital gains affects inter-corporate M&As. Studying several substantial tax reforms in a panel of 30 countries for the period of 2002-2013, we identify a significant lock-in effect. Results from estimating a Poisson pseudo-maximumlikelihood (PPML) model suggest that a one percentage point decrease in the corporate capital gains tax rate would raise both the number and the total deal value of acquisitions by about 1.1% per year. We use this result to estimate an efficiency loss resulting from corporate capital gains taxation of 3.06 bn USD per year in the United States.

Suggested Citation

  • Lars P. Feld & Martin Ruf & Ulrich Schreiber & Maximilian Todtenhaupt & Johannes Voget, 2016. "Taxing Away M&A: The Effect of Corporate Capital Gains Taxes on Acquisition Activity," CESifo Working Paper Series 5738, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5738
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    References listed on IDEAS

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    Cited by:

    1. von Hagen, Dominik & Pönnighaus, Fabian Nicolas, 2017. "International taxation and M&A prices," ZEW Discussion Papers 17-040, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Heim, Sven & Hüschelrath, Kai & Laitenberger, Ulrich & Spiegel, Yossi, 2017. "Minority share acquisitions and collusion: Evidence from the introduction of national leniency programs," ZEW Discussion Papers 17-037, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. Todtenhaupt, Maximilian & Voget, Johannes, 2017. "International taxation and productivity effects of M&As," ZEW Discussion Papers 17-014, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

    More about this item

    Keywords

    corporate taxation; M&A; capital gains tax; lock-in effect;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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